Cost Allocation Obfuscation – eBook Pricing

Cost, especially fixed cost allocation, has nothing to do with pricing. Unless you are selling to the Government which allows you to quote only cost plus pricing. Government contractors are more than happy to do so because they not only include the variable cost of making a toilet seat but also add to it its share of all their fixed costs. So when you assign each toilet seat its share of building cost, executive salaries, etc etc you get $2000 as price tag.

Allocating each unit produced, its share of fixed cost is a financial accounting artifact – required by GAAP accounting rules. When convenient, like in obfuscating the true marginal cost to justify higher prices, some businesses are happy to adopt it.

Now publishers are adopting the same obfuscation to justify their eBook prices. Since they are not selling the value of the book, they are facing challenges from customers expecting lower prices on eBook over hardcover books.

Michael Connelly’s recent legal thriller, “The Fifth Witness,” has more one-star reviews on Amazon than five-star reviews in part because some angry reviewers focused on the e-book’s $14.99 price.

Customers expect publishers to pass on cost savings from paper and printing charges in the form of lower prices. What are publishers resorting to? Obfuscation

Publishers argue it’s impossible to break out a profit per title that includes a percentage of all their costs because all books have unique one-time costs which are broken out over an unknown number of copies. It’s also hard to apply corporate overhead costs against the sales of individual titles.

They are hiding behind cost argument to say their “margin” per eBook is still low and hence it deserves prices that are comparable to hardcover.

If they are not willfully obfuscating, they are just plain ignorant in their cost allocation. Hard to believe.

All these because publishers are not addressing , “what job is the customer hiring a book for”. There is no attempt to sell the value. If the publishers are not differentiating on the content and the customers are not seeing difference between different titles (not their fault), both sides argue about the cost.

Does the customer get any less information value from a eBook than a hardcover book?

The real disruption of the publishing industry is yet to come. We will start seeing, substitutable, undifferentiated, and copious content sold as commodities for less than 99 cents and high value content sold at prices that capture a fair share of the value created for customers.

Until then, publishers, customers and all the media bloggers will focus on costs.